The Internal Revenue Service (“IRS”) recently issued a revised Form 720, “Quarterly Excise Tax Return,” to provide for the reporting and payment of fees imposed on specified health insurance issuers and plan sponsors of certain self-insured health plans by the Patient Protection and Affordable Care Act of 2010 (“Affordable Care Act”). The fees help fund the Patient-Centered Outcome Research Institute (“PCORI”) which is intended to assist research efforts to help patients, clinicians, purchasers and policymakers make informed health decisions. For many plans (including calendar year plans), the initial PCORI fee must be paid by July 31, 2013. In general, the applicable insurance company pays the PCORI fee for specified health insurance plans and the plan sponsor is responsible for the payment of the PCORI fee owed with respect to a self-insured health plan. This memorandum describes the PCORI fee payment requirements that apply to self-insured health plans.
Plans Subject to The Fee
The PCORI fee is payable by the plan sponsor of an “applicable self-insured health plan.” Such plans include most self-insured medical and prescription drug plans, and health reimbursement arrangements (“HRAs”). Health flexible spending arrangements (“FSAs”) and plans that are limited to vision and dental benefits will only be subject to the PCORI fee if the benefits are not considered HIPAA excepted benefits (any benefit that is considered an excepted benefit under Section 9832(c) of the Internal Revenue Code is not subject to the PCORI fee). HIPAA excepted health FSAs generally include those that are funded solely by employee elective contributions and those to which the plan sponsor makes a contribution that does not exceed two times the employee’s elective contributions (or, if greater, the employee’s elective contributions for the year, plus $500). Employee assistance programs (“EAPs”), disease management and wellness programs will be subject to the PCORI fee only if they provide “significant” benefits in the form of medical care or treatment. While most dental, vision and health flexible spending account plans are considered HIPAA excepted benefits, and most EAPs, disease management and wellness programs do not provide significant benefits in the form of medical care or treatment, plan sponsors who offer these arrangements should analyze each arrangement to ensure that it is not subject to the PCORI fee. Selfinsured policies designed to cover employees who are working and residing outside of the United States also are not subject to the PCORI fee.
The PCORI fee is based on the average number of covered lives during the applicable plan year. Covered lives include COBRA qualified beneficiaries and retirees covered by an applicable self-insured health plan. For plan years ending after September 30, 2012 and before October 1, 2013, the fee is $1 multiplied by the average number of covered lives under the plan during the plan year. This amount increases to $2 for plan years ending after September 30, 2013 and before October 1, 2014. For subsequent plan years, the applicable dollar amount is indexed based on national health expenditures (the final plan year for which a PCORI fee will be owed is the last plan year ending before October 1, 2019).
Plan sponsors of applicable self-insured health plans are permitted to use one of the following three methods to determine the average number of covered lives:
Actual Count Method: Under the actual count method, a plan sponsor determines the average number of covered lives by adding the totals of lives covered for each day during the plan year and dividing that total number by the number of days in the plan year.
Snapshot Method: Under the snapshot method, a plan sponsor determines the average number of covered lives by adding the total lives covered on one or more dates during the first, second, or third month of each quarter during the plan year and dividing that total by the number of dates on which a count was made. The applicable regulations contain special rules for selecting these dates. The regulations provide for two separate methods in determining total lives covered. Under the “snapshot method,” the number of total lives equals the actual number of lives on the counting date. Under the “snapshot factor” method, the number of total lives is determined by adding the number of participants with self-only coverage plus the number of participants with coverage other than self-only coverage on the counting date, multiplied by 2.35.
Form 5500 Method: A plan sponsor may determine the average number of lives covered under a plan for a plan year based on the number of participants reported on the Form 5500 that is filed for the applicable self-insured health plan for that plan year. For a plan offering only “self-only” coverage, the average number of lives covered under a plan for the plan year is the sum of the total participants covered at the beginning and end of the plan year, divided by 2. The average number of lives covered under a plan that offers self-only coverage plus other coverage options equals the sum of the total participants covered at the beginning and end of the plan year. Note that plans utilizing the Form 5500 method can only do so if the Form 5500 is filed by the PCORI fee due date (e.g., a calendar year plan that that utilizes the 2-1/2 month extension to file the Form 5500 may not use the Form 5500 method).
If a plan sponsor maintains more than one applicable self-insured health plan, the plans can be treated as a single applicable self-insured health plan provided the two plans have the same plan year. For example, if a plan sponsor maintains both a self-insured medical plan and a self-insured prescription drug plan, these two plans could be considered one plan for purposes of the PCORI fees, provided the two plans have the same plan year. Similarly, if a plan sponsor maintains an HRA and an applicable self-insured health plan, the HRA and the health plan may be considered a single health plan if they share the same plan year.
There are also special rules for counting covered lives for health FSAs and HRAs that are subject to the PCORI fee (i.e., FSAs and HRAs that are not HIPAA excepted benefits). If the plan sponsor only offers a health FSA or HRA and not other applicable self-insured health plans, the plan sponsor may treat each participant’s health FSA or HSA as covering a single life (the participant’s spouse and dependents are not counted).
Notwithstanding the general rules described above for determining the average number of covered lives during a plan year, for plan years beginning before July 11, 2012 and ending on or after October 1, 2012, plan sponsors are permitted to use any reasonable method to determine the average number of lives covered under an applicable self-insured health plan. This limited relief could be helpful to sponsors of self-insured health plans that are calendar year plans.
Payment of PCORI Fees - Revised Form 720
The PCORI fee is required to be reported annually on IRS Form 720. The Form 720 is due on July 31 of the year following the last day of the plan year. The IRS recently updated the Form 720 and instructions to address the PCORI fee. For plan sponsors that file Form 720 solely to report the PCORI fee, only one Form 720 needs to be filed annually (i.e., even though the Form 720 is a quarterly tax form, only a single Form 720 should be filed for the second quarter of each year). Payment should be made with the related payment voucher, Form 720-V. Form 720 and Form 720-V can be found at: www.irs.gov/pub/irs-pdf/f720.pdf and the instructions can be found at www.irs.gov/pub/irs-pdf/i720.pdf .
IRS Rules PCORI Fees Are Deductible
Plan sponsors received some good news recently when the IRS ruled that the PCORI fees paid are considered ordinary and necessary business expenses and, therefore, are deductible under Section 162 of the Internal Revenue Code.
Sponsors of applicable self-insured health plans that operate on a calendar year plan year, or on a plan year that began between October 1, 2011 and December 31, 2011, must make the initial PCORI fee payment by July 31, 2013 (PCORI fee payments for all other plans are not due until July 31, 2014). Sponsors of plans that are subject to the July 31, 2013 payment deadline should begin to take steps to pay the applicable fee, to the extent that they have not done so already. These steps include (1) determining the number of applicable self-insured health plans maintained by the organization, (2) determining the average number of covered lives for each plan, and (3) preparing and submitting the revised IRS Form 720 by the July 31st due date.
If you have any questions about this memorandum, please contact John Godsoe in our Buffalo office (716-566-2850, firstname.lastname@example.org) or any of the other members of our Employee Benefits and Executive Compensation Practice Group listed below.